Comment 73652

By jorvay (registered) | Posted February 02, 2012 at 10:52:49 in reply to Comment 73590

And here is the biggest misconception in municipal finance: using debt to pay for long-term assets is more fair because future generations that help pay off that debt will share the use of the infrastructure.

Why is it a misconception? There are two reasons. 1) Cities are perpetual, or at least are expected to have extremely long lives. This means that expenditures that seem like one-time capital costs to you or me actually start to look like regular, predictable expenditures from the viewpoint of the city. New roads are built and existing roads are maintained every year. From the city's view point, that's the equivalent to picking up a cup of coffee every morning on the way to work. Even something like a major building (70ish year design life is typical) starts to seem more like a predictable and regular over the life of a city. Maybe the equivalent to a person buying a car every four years. This brings me to... 2) It is almost always cheaper to save up for purchases, no matter how big, than it is to use debt. Saving up allows you to both avoid interest rates and actually earn interest on the savings until the time that they are required to make the purchase. The reason that people don't save up to buy a car or house isn't because it's cheaper to borrow for those purchase, but because it takes so very long to save up for them and we typically need them soon. But for smaller purchases, debt is usually considered to be a foolish choice, and for good reason. In fact, if you read further into some of those State of the Infrastructure reports, what you find is that on something like City Work Yards, the annual cost of saving up for new facilities and repairs in advance would be about 26% cheaper per year than borrowing for the same exact expenditures. And that doesn't include any interest income on savings. In other words the question is this: would you rather pay $1 for a box that your parents built (while they payed $1 for the old box that it replaced), or have them pay $0.75 to build the same box up front and you pay $0.75 for the next replacement box for your kids? In the long term, every body gets a box, but the debt scenario costs a lot more. The only really tricky part is moving from debt-financing to savings-financing.

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